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Facing a Financial Crisis

How churches should handle a possible loan default.

While the rate of mortgage defaults by churches remains relatively small, 2009 was still a challenging year for houses of worship. We asked three lenders active in the church market to tell us what churches facing a financial crisis should do in 2010 if they aren't able to make their mortgage payments:

Henry Chi, Evangelical Christian Credit Union:

1. Evaluate your ministry priorities in light of the present situation. Based on those priorities, review your programs and budget, then reallocate financial resources, cut expenses, and, if necessary, cut programs that don't align with your priorities. Circumstances like this can be a catalyst for thinking more strategically.

2. Communicate with your lender. Inform the lender of the actions you're taking, find out if there are ways to restructure your banking accounts to reduce fees and increase returns, and ask if the lender will work with you to modify your loan.

3. Evaluate your financial management. Beyond looking at expenses and banking practices, review your cash management policies and procedures to be sure funds are being handled best. We recommend doing so through a grid of ministry banking priorities that examine cash flow, liquidity, and stewardship of other ministry assets, such as real estate and personnel.

4. Keep watch. Ministries capable of making their mortgage payments should monitor the impact of the economy on their community and congregation, and develop forecasts that will enable them to make proactive decisions should their situations change.

Dan Mikes, Bank of the West:

1. Implement a policy of monthly board meetings for the foreseeable future. The primary focus should be review and analysis of year-to-date actual contributions and budget performance. The most common mistake we see is over optimism and procrastination in making tough and timely expense-reduction decisions.

2. Don't lose sight of the big picture. If you lose your building, your credibility with your donor base will be severely or terminally damaged. Target expense reductions that have little to no impact on revenue flows, such as television and radio efforts, foreign endeavors, and so on. These are hard decisions, but hopefully, they are temporary.

3. Some churches reduce salaries, replace some staff positions with volunteers, increase the employee's share of benefits costs, and reduce or eliminate honorariums.

4. Talk to the lender early and often. Don't wait until you can't make your payment. Have a comprehensive dialogue, including expense cuts made to date, additional planned cuts, board involvement, and plans to contact key donors. The board should also know, and discuss with the bank, the collateral value of the church property, and the possibility of marketing it to salvage equity prior to a foreclosure. This assures the lender that the church leadership is looking at all scenarios. Lenders will be more willing to work with a borrower when they can see a good management team is fully engaged and communicating.

J. Scott Reitsma,Christian Community Credit Union:

1. Assess what you own. Evaluate all historic sources of income. Also, take inventory of all church assets, including bank accounts, brokerage accounts, real property, vehicles, non-real estate property, and so on. Now, decide if you will keep all of your prior commitments in a God-honoring way and in the appropriate priority. If your answer is yes, then you must pledge that all church assets will become available, if necessary, to resolve the current financial distress.

2. Analyze your ministry model. Review all expense categories and consider expense reduction in all discretionary line items. In this analysis you must make the toughest choices immediately because it will not become easier, particularly with regard to staff reductions. Evaluate your church's facilities, land, and other assets. Are all available building areas fully used? Have you considered sharing (renting) your facility with other churches? Perhaps you need to consider selling under-used portions of your property, if possible.

3. Talk to your congregation. It may sound obvious, but why not allow your congregation to make a "fully informed" decision about their participation in resolving the financial situation of the church? Let's be careful that we do not deny the congregant the opportunity to engage in ministry in a very meaningful way. There is nothing more heartening (and faith confirming) than watching God's Spirit miraculously move within a congregation in situations like these. Very often, these congregationally initiated financial "turn-around" stories provide the powerful testimonies that produce dramatic impact in our communities.

4. Remember that your lender (if they are a regulated financial institution) has much more flexibility if you are current on your obligations. Your lender's options diminish dramatically once you are in default.

Matthew Branaugh is editor of content and business development for Church Law & Tax at Christianity Today. He earned his juris doctor (JD) with honors from the University of Denver Sturm College of Law.

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